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Is Aurora Cannabis Inc. (TSX:ACB) Undervalued in the Cannabis Sector?

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To start the year, I’d discussed how cannabis stocks were well positioned for a bounce back after a rough stretch to finish 2018. The Horizons Marijuana Life Sciences ETF (TSX:HMMJ) had surged 52% in 2019 as of close on February 27. This is compared to the 19% plunge the ETF suffered in 2018.

However, in February I’d warned investors that cannabis stocks were becoming overheated. This is true for a bundle of equities on the TSX, which has enjoyed one of the best starts in the index’s history. Today I want to focus on one cannabis stock that has turned in a middling return in comparison to some of its peers.

Aurora Cannabis (TSX:ACB)(NYSE:ACB) stock was up 0.91% in early morning trading on February 28. The stock had climbed 45.7% in 2019 and was up 11% month over month. Aurora has emerged as something of a black sheep among the big producers, especially with rivals like Canopy Growth and Cronos Group receiving a bump from a recent Canadian Imperial Bank of Commerce report on the industry. Is Aurora undervalued right now, or is the skepticism regarding the Edmonton-based company warranted?

Aurora stock has avoided overbought territory in 2019 even as the sector has remained hot; the stock boasted an RSI of 58 as of this writing. Shares are currently hovering in the middle of its 52-week range.

The company released its fiscal 2019 second-quarter results on February 11. Aurora met its revenue guidance from January and reported a total of $54.2 million, up 83% from the prior quarter. This total was on the higher end of its revenue guidance. The company accounted for 20% of all consumer sales across the country for the Q2 2019 period. Aurora will need to make up ground if it hopes to compete in recreational sales with companies like Canopy Growth, which saw recreational sales blow past medical sales since legalization.

Aurora is projecting a big spike in revenue growth in the latter quarters of fiscal 2019 as it ramps up its domestic production. It also expects to expand its reach in international markets. On February 26, Aurora announced that it would expand into Portugal with the acquisition of 51% ownership in Gaia Pharm, a license applicant in the country. This will allow Aurora to establish a local facility to produce cannabis and derivative products.

The Aurora Sky facility is expected to be fully planted this month, and products will be available for sale by June. With the availability of Aurora Sky’s production, the company forecasts that costs per gram will shrink in the second half of the fiscal year. The company projects that revenue growth combined with reduced costs will result in sustained positive EBITDA starting in the fourth quarter of fiscal 2019.

Given the high valuations on the TSX, investors should be prepared for a shakeup in March. Aurora and the cannabis sector are risky bets in the late winter. However, Aurora stock comes at a nice price if investors can snag it below the $10 mark. In the long-term, we should start to see its sky-high production capacity pay off in the coming quarters.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan owns shares of Aurora Cannabis.

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